Applications of Simple Interest

Following are five most popular real-life applications of simple interest:

Bank Loans: Many individuals in India take out loans from banks for various purposes such as buying a house, a car, or funding education. Banks typically calculate the interest on these loans using simple interest. Borrowers need to understand how much interest they will be paying over the loan term.

Fixed Deposits: When individuals invest their money in fixed deposits, banks pay them interest on the principal amount deposited. The interest earned is usually calculated using simple interest. Investors can use simple interest calculations to determine their returns over the FD tenure.

Recurring Deposits: Similar to fixed deposits, recurring deposits (RDs) allow individuals to save money over a period of time. The interest earned on recurring deposits is also calculated using simple interest. Customers can calculate the maturity amount they will receive at the end of the RD tenure based on the monthly deposit and the applicable interest rate.

Retail Installment Schemes: Many retail stores and businesses offer installment schemes for purchasing goods such as electronics, furniture, or appliances. These schemes often charge simple interest on the installment payments. Customers can understand the total amount they will pay over the installment period by calculating the simple interest component.

Microfinance: In rural areas and small towns of India, microfinance institutions provide financial services to low-income individuals and entrepreneurs who may not have access to traditional banking services. The interest charged on microfinance loans is typically calculated using simple interest. Borrowers can determine the total repayment amount based on the principal borrowed and the applicable interest rate.

Simple Interest is the interest paid on the principal amount for which the interest earned regularly is not added to the principal amount as we do in compound interest.

Let’s learn more about Simple Interest in detail, including its formula and examples.